Budgets blown on commodities, $A

Governments across Australia are heading into 2013 with rapidly deteriorating budget positions as an unusual confluence of lower commodity prices and a persistently high Australian dollar saps revenue.

The doubly-whammy has rattled Canberra heading into an election year and left states from Queensland to NSW, South Australia and Western Australia reeling.

At issue are billions of dollars of tax revenue and mining royalties that are no longer expected to be collected as budgets are adjusted to account for a new reality, in which falls in the Australian dollar can no longer be counted on to ease the pain of declining terms of trade.

Treasurer
Wayne Swan
summed up the situation on Thursday as he abandoned the federal government’s long-standing commitment to deliver a budget surplus in 2012-13.

“What we’ve seen is a sledgehammer hit on our revenues thanks to the deepest and most sustained period of economic turmoil since the Great Depression," Mr Swan said.

“What we’re seeing in our numbers today means that $160 billion has been ripped from the budget bottom line over five years."

While Labor’s repositioning may bring political pain, it has generally been received in business and economic circles as the only rational position the government could have taken. But at the same time it has swept away any remaining notion that Australia’s mining industry would somehow keep it immune from the economic pain felt throughout the rest of the global economy since 2008.

State Treasurer
Troy Buswell
also trimmed the forecast surplus for this financial year to $140 million, down from $196 million it had predicted in May.

At the same time, mid-year budget updates this week from NSW, Queensland and South Australia revealed those states will post deficits until 2014-15 amid ongoing global economic uncertainty and falling revenue from mining royalties.

NSW and Queensland expected to lose more than $1 billion each in mining royalties in the next four years because of lower coal prices and the high Australian dollar. This includes about $500 million each this financial year.

But the state adjustments pale in comparison to the changing federal budget position, which some economists say will saddle the Labor government with a budget deficit of between $5 billion and $15 billion in the run-up to next year’s federal election.

FEDERAL OPPOSITION HEDGES SURPLUS BETS

As the politics of the federal budget took on a new hue on Friday, opposition Treasury spokesman
Joe Hockey
also backed away from the Coalition’s pledge to deliver a budget surplus if elected, saying it would be “reckless" to promise a surplus before he knows the true state of the budget.

“We are not going to make promises that we cannot keep. And therefore, if we don’t know what the books are like, and the books haven’t closed, then how could we possibly make those sort of commitments?" he said.

“Wayne Swan knows what the books are like but he won’t tell the Australian people ... I will not speculate, I will not make reckless promises."

Opposition Leader
Tony Abbott
also left wiggle room, saying the Coalition believed it could deliver surpluses in every year of a future government, based on the existing figures in the budget.

“The Treasurer didn’t release new figures yesterday, so the old figures stand until such time as they are replaced – based on the existing figures we think there will be a surplus in every year of a Coalition government should we would win an election,’’ he told Fairfax radio station 4BC.

“Based on the figures we think we can deliver a surplus in every year."

SWAN LAMBASTS BUDGET ‘HUFFING AND PUFFING’

Mr Swan seized on Mr Hockey’s comments, asserting that the Coalition had also shifted its position on its commitment to a budget surplus.

“For all his huffing and puffing over the past 24 hours, now he’s quietly changing the Opposition’s position, hoping nobody would notice," Mr Swan said.

“We stood up and explained why we don’t think it would be responsible to cut harder or further in 2012-13 to fill a hole in tax revenue if that jeopardises growth or jobs."

The fierce budget politicking on Friday was at odds with the reaction of financial markets and ratings agencies, which took the federal governments decision to abandon its surplus pledge in their stride.

AUSTRALIA’S TRIPLE-A RATING AFFIRMED

Moody’s Investors Service reaffirmed Australia’s triple-A ratings with a stable outlook, saying a delay of a year in returning to surplus was not really significant from a rating perspective.

“Whether the government has a small surplus or a small deficit is not important for the rating," said Steven Hess, a New York-based analyst at Moody’s.

“Australia’s government debt in comparison to other Aaa-rated sovereigns remains very low, and that relative position won’t change in the foreseeable future."

Standard & Poor’s and Fitch echoed Moody’s move, saying the government’s decision had no implication on the nation’s triple-A ratings.

In an interview on ABC radio, Mr Swan said punters could still trust Labor, despite the decision to dump the surplus “because the data, the revenue figures changed and the only responsible thing to do in those circumstances is evaluate where it leaves us for the future".

“What has changed is the revenue numbers that have come through to us from the Tax Office. We have been working our way through that data and our conclusion is that we lost in four months the equivalent of what we had written down at the mid-year update for the whole year. So that was a huge whack to revenue,’’ Mr Swan told the ABC.

“To get to surplus in 2012-13 we’d have had to make cuts to the budget that would impact on jobs and growth ... as a Labor government, our priority is always jobs and growth."

CALL TO LOOSEN FEDERAL PURSE STRINGS

The government’s decision to abandon its promise to deliver a 2012-13 budget surplus came after the latest monthly financial statement showed a worse than expected $3.9 billion plunge in cash receipts for the first four months of the financial year.

Speaking on Thursday, Mr Swan said he was putting the economy before politics in opting against further spending cuts to push the budget into surplus in favour of allowing the “automatic stabilisers" to work on the revenue side of the federal budget.

“We are going to apply our fiscal rules in a common-sense way," he said. “The whole point of the fiscal rules is to have sustainable growth."

But while Mr Swan said the government remained committed to spending restraint, key cross-bench MPs have asserted the government should consider loosening the purse strings.

Speaking on Friday morning, independent MP
Rob Oakeshott
said the government may need to consider further economic stimulus in the absence of improved consumer confidence.

“Unless there is a bumper summer, unless we really can see some increase in consumer confidence and consumer spending, I do think the conversation in the first quarter next year will be one about whether to stimulate the economy with a third round of stimulus."

Greens MP
Adam Bandt
, meanwhile, called on the government to reverse budget cuts that have hit single parents, foreign aid and university research.

“The damage that has been done now needs to be reversed," Mr Bandt said. “The government should immediately announce, given that it’s ditched its early surplus deadline, that all the cuts it has made to achieve that abandoned goal will now be reversed."

LEARN LESSONS FROM EUROPEAN AUSTERITY: LABOR’S CAMERON

Governments in Queensland, NSW, South Australia and Western Australia have also been pursing spending cuts to help push their budgets towards surplus.

In Western Australia, which is also facing an election next year, state Treasurer Troy Buswell defended the government’s handling of the state’s economy and maintained that a rebounding iron ore price would improve WA’s fiscal outlook.

However, federal Labor backbencher
Doug Cameron
sounded a more ominous note, cautioning that Australia should learn from Europe’s austerity push, which had driven the economies of many countries backwards.

“We should not be out there arguing fiscal austerity when there are major parts of the economy still in recession and still not recovered from the global financial crisis," he said.